EU debt crisis adds uncertainty for contract services - Pharmaceutical Technology

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EU debt crisis adds uncertainty for contract services
Having barely begun recovering from the economic slump that began in 2008, the contract services industry must now face the consequences of the debt crisis in Europe, which will include reduced bio/pharmaceutical expenditure by governments. CMOs will feel the effect of this in fewer batches and increased pressure to reduce prices.

Pharmaceutical Technology Europe
Volume 22, Issue 6

Mixed news for European CMOs

CMOs will feel the effects of reduced healthcare expenditures in the form of fewer batches and smaller batches, and pressure from clients to reduce prices. This will be especially difficult for European CMOs, which must already compete in a market saturated with capacity and widespread price-cutting.

However, there may be some positive outcomes for European CMOs. EU CMOs typically have a significant amount of generics in their product mix and may be able to offset reduced demand for branded products with increased orders for those generic products. Unfortunately, if the pressure on drug prices is too severe it could lead to generics being imported from Asia rather than being domestically-produced, delivering a double blow to European CMOs.

Another issue for European CMOs is the decline in the value of the Euro relative to the US dollar. The Euro has weakened considerably in 2010 relative to the US dollar, dropping to a 2year low in early May. The €750 billion bailout package approved by the European Central Bank (ECB), International Monetary Fund (IMF) and EU members in midMay stabilised the exchange rate, but the likelihood of a recession following the expected spending cuts could keep the exchange rate down for several years.

A lower US dollar/Euro exchange rate should be a positive development for the European CMOs and CROs because it will increase their competitiveness relative to their US counterparts — the cost in dollar terms of services priced in Euros is already 15% lower than they were just 6 months ago. Development services that span a relatively short timeframe and that are not subject to the long-term currency risk of commercial manufacturing contracts should benefit from the currency depreciation, even if it is short lived.

European CMOs may be positioned to benefit from a medium to longterm Euro decline because many have been building their North American sales presence in recent years to find relief from the intenselycompetitive European market. Because of the local market conditions, the European CMOs are more accustomed to competing on price than the North American CMOs and the cheaper Euro could make their case stronger. Some European CMOs have been able to command a price premium even with a strong Euro and they will look even more attractive with a weak Euro.

Uncertain outlook

The sovereign debt crisis has blown up just as the contract services market appeared to be emerging from the slump induced by the financial crisis that began in 2008. This latest crisis promises to make the nearterm prospects of the industry more uncertain. Perhaps the ECBIMFEU stabilisation plan announced in May will instill enough confidence in EU financial markets to allow the market improvement to continue; however, there are major forces at work that may not be entirely in the control of governments and international institutions, let alone individual companies. Only time will tell how things will play out.

Jim Miller is President of PharmSource and a member of Pharmaceutical Technology Europe's Editorial Advisory Board.


1. OECD.Stat Extracts.

2. Generic Medicines: Essential contributors to the long-term health of society (IMSHealth, March 2010).

The author says...

  • Europe's sovereign debt crisis will ultimately strike the bio/pharmaceutical industry as governments seek to reduce healthcare expenditure.
  • Savings will come about via the increased use of lowerpriced generics as well as certain more expensive drugs being excluded from national health services.
  • Although CMOs will feel the impact of the new crisis, they may be able to offset the shrinking demand for branded products with increased orders for generics.
  • European CMOs with a North American sales presence will be in a strong position compared with their North American competitors because they are more accustomed to price competition.


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